Diageo set to increase use of locally sourced raw materials in Nigeria to head-off headwinds

Diageo said it will increase its use of locally sourced raw materials in Nigeria in a bid to tackle current macro-economic challenges in the country.

Speaking to analyst during a conference call late last week, Diageo’s Africa President, John O’Keeffe, said he was “mindful of the short-term uncertainty” in Nigeria, which could lead to currency devaluation. Nigeria is facing one of its worst economic crisis in decades, with falling oil prices impacting everything from government revenue shortfalls to inflationary pressures and currency depreciation. The government has so far resisted pressures to devalue the naira.

Diageo says it is taking proactive steps in the market, according to O’Keeffe.

“We are increasing the amount of local raw materials that we’re using,” he said. Not that long ago, we we’re using about 30% in Nigeria, and that has moved up to 50%. We will be kicking on from that at an accelerated pace.

Diageo’s competitors would face the same problems in the market, O’Keeffe warned. “I think there will be a direct impact associated with direct input materials that are not available in Nigeria, and I think that’s going to be common across all the competitive sets, not just ourselves,” he said. “In addition, we expect local packaging material inflation to be impacted by both FX on domestically-produced goods and again that will be common across all players.”

“Elements of the inflation impact would have to be passed onto the consumer, but the company would remain “mindful of affordability,” he said.

On the ongoing merger between Anheuser-Bush InBev (AB InBev) and SABMiller, O’Keeffe reiterated that Diageo does not expect the merger to impact its business in Africa. “The reality is that ABI doesn’t have really a footprint in Africa at all, and therefore I don’t see the competitive landscape changing with the consolidation of those two entities,” he said.

According to O’Keeffe, SABMiller has always been extremely competitive” and he expects the company to remain that way after the acquisition has been finalized. “I don’t really see a change on that front from an Africa perspective,” he added.

Africa accounts for about 13% of the group’s net sales. That amount has more than doubled in the last 10 years, according to the company. Beer and non-alcoholic malt drinks account for 60% of the group net sales on the continent. Spirits make up just under 30% of net sales, more than half of which comes from the group’s scotch whiskey portfolio.